Archive - Apr 2013

"In order for central banks to achieve their ultimate economic objective - which is growth and jobs - they have to push investors into taking more risk than is justified," is the somewhat chilling warning that PIMCO's Mohamed El-Erian gives in this excellent interview with the WSJ. "Central banks are operating through the wealth effect and animal spirits," El-Erian says peeling back the truth onion, as they prop up asset prices to "artificial levels, in virtually every market." Worries over the central bankers of the world withdrawing easy money policies too early are "unwarranted," he notes, adding that he suspects, "they will most likely stay too long and they will consciously make that mistake." Critically, though, he sends a message that appears to fit with many of our recent discussions (most recently here) that "if these levels aren’t validated by the fundamentals, then investors will get hurt."

Whether by intent or good fortune, gold's plunge in the last few days has reduced its appeal as a store of wealth and spurred the more central-planner-biased view that the US Dollar is the 'safest' place to deposit your hard-earned after-tax wealth. However, as Cypriots learned the hard way, trust in the entire system depends on the counterparty (in the case of bank deposits, you are implicitly lending your money for no return to a highly-leveraged entity) covered by an FIDC guarantee. As the following infographic makes very clear, that level of trust is remarkable when the reality is that gold is an asset without any counterparty risk and without any implied risk.

Yesterday we got a flashback of 9/11, and now the Anthrax scare is back. From @911Buff

LETTER ADDRESSED TO A U.S. SENATE OFFICE INTERCEPTED AT U.S. CAPITAL, TESTS POSITIVE FOR RICIN POISION.
POISON LETTER WAS SENT TO SENATOR ROGER WICKER FROM MISSISSIPPI AT THE CAPITOL. FBI INVESTIGATING.

Ricin's toxic history is long and illustrious: starting with the death of Bulgarian dissident journalist Georgi Markov, using the infamous KGB umbrella, and most recently used by Walter White (unsuccessfully) to eliminate the meth dealing competition.

The last decade has seen significant changes in media and communication. In a world where there is an ever louder cacophony of news sources competing for our attention, any one particular story has to be communicated at a particularly high volume if it is to attract notice. UBS' Paul Donovan warns that this perhaps gives a tendency to sensationalism. For financial markets, Donovan notes, there is a risk that these changes in the world of media will impinge on the calm and reflective world of economics. Economists rely on sentiment data as a leading indicator for future economic trends. If individuals are overreacting to events relative to the past, however, sentiment may not be as useful as a barometer of future economic activity. In the US a certain economic hysteria seems to be developing, amongst consumers in particular (especially compared to Europe) and Donovan suggests investors would be wise to treat US sentiment data (particularly consumer sentiment data) with some caution as American investors appear to react more strongly to the underlying economic events.

Today's bounce back in gold prices is fading into the close and as Barclays Suki Cooper notes, despite some physical demand response to lower prices, it has not been sufficient to combat the overall decline. In the absence of support from physical buying, where does fundamental support materialize? Should gold just put on its commodity hat, instead of its increasingly more popular currency one, its cost of production should provide some guidance.

By now regular readers should be aware that one of our favorite metrics on the state of not only the economy, but corporate viability in the New Normal centrally planned age, are not fudged, manipulated earnings which always find a way to "beat" downward revised expectations, not even free cash flow (which in far too many cases has ceased to exist), but capital expenditures for two reasons: i) it number can not be fudged, adjusted, recasted or in any other way modified, and ii) it represents the managements' own view of what the growth prospects of the company are. The logic is simple: if management itself is not confident on growth prospects, it will not replenish its asset base (already at a record old age across the world) and will not invest in projects that have a high hurdle rate but only after several years of gestation. Instead, management will merely opt to use the company as a cash cow in the here and now, extracting as much shareholder value is possible with dividends and buybacks while the future viability of the company... well, that can be some other management team's concern.

Yesterday's high volume dumpfest in stocks - its biggest drop in 5 months - is followed by a considerably smaller volume pumpfest that elevates the S&P by its 2nd most of the year (2nd only to the opening day of the year). The 'excessive' grab for protection yesterday that took VIX above 17% was smashed into the open and provided the ammo to leak stocks higher all day (VIX fell 3.3vols back under 14% - the biggest VIX drop of the year). The critical level for the bounce appeared to be the pre-Boston drop and every major index managed to regain it - with the Trannies leading the way. S&P futures regained 60% of the Friday-to-Monday slump, gold regained around 25% of its drop, and 10Y yields rose on the day, unwinding around 35% of the rally in Treasuries. EUR strength (and broad-based USD weakness) provided some impetus for algos to lift stocks. All-in-all, today's lower volume, lower average trade size move is not surprising and the coincident close of the S&P at around yesterday's VWAP (and lesser follow-through on other risk-assets) suggest this is more a bounce than a renewed uptrend for now.

That the IMF is the most unwavering optimist despite fundamentals, facts and reality has been well-documented over the years. For those who still haven't seen the agency's perpetual upward bias in forecasting world growth, a quick scan of the charts below will cement the understanding that all the Washington-based serial bail-outer of insolvent countries is, is a dispenser of optimism and whose agenda is simply to preserve confidence that all is still well. The charts show how just over the past year's six outlook revisions, the IMF has been forced to downgrade, with quarterly precision, its overly optimistic forecast for virtually every part of the world, from the US, to the Euroarea, to China, and of course, the entire world: the black line is the most recent revision set - it also happens to be the lowest one. However, one chart which deserves particular attention not because it is accurate, but because the rate of deterioration is truly troublesome, is the IMF's view on global trade volume of goods and services. It is here that one can clearly see the disastrous impact of global central bank micro-mismanagement, capital misallocation and central planning. In short: global trade is collapsing - even from the point of view of one of the staunchest macro optimists - at a rate unseen since the Great Financial Crisis, and the Great Depression before it.

Presented with no comment.

In 1996 it was Alan Greenspan with his "irrational exuberance" call, is Janet Yellen sending the same message, as she warns...

• *YELLEN SEES SIGNS `SOME PARTIES ARE REACHING FOR YIELD'
• *YELLEN SAYS LOW INTEREST RATES MAY PROMPT `TOO MUCH LEVERAGE'

Did the Fed's most dovish member, and likely next chairperson just suggest that, while 'lower for longer' rates will continue, that stocks and high-yield credit look a little more than frothy.

The recent plunge in gold prices below $1500 an ounce has suddenly awoken, well, just about everyone.  The "gold bugs" are yelling that it is a conspiracy theory by the Fed while the stock market bulls say it is a sign that the Fed has achieved its goal of creating economic growth.  Unfortunately, both arguments, while great for headlines, are wrong. The real concern for investors should not be the fall of gold - but the overall stock market.  With investors fully allocated to the markets - the lurking correction therein is potentially far more dangerous to portfolios than the current fall in gold simply due to weighting differences. Even with earnings hurdles moved substantially lower in recent weeks it may not be enough to offset the softening global economy. Perhaps, just perhaps, this is what gold, commodities and interest rates are really telling us.

For those flying in the northeast today, especially in and out of Boston, it is just not their day (all the more so if there are terroristy-looking, Arab-speaking passengers nearby). The day just got much worse for those flying American Airlines. Via BBG:

• FAA SAYS ALL AMERICAN FLIGHTS GROUNDED AT AIRLINE'S REQUEST
• FAA SAYS AMERICAN GROUNDINGS DUE TO AIRLINE COMPUTER PROBLEMS
• AMERICAN AIRLINES SAYS SABRE RESERVATION SYSTEM OFFLINE
• AMERICAN AIRLINES REPORTS RESERVATION SYSTEM OUTAGE ON TWITTER
• SABRE SAYS THERE ARE NO PROBLEMS WITH AIRLINE BOOKING SYSTEM
• FLIGHTS MAY RESUME AT 5PM EASTERN

Must be the evil Chinese hackers' fault again, and it is about time the government stepped in and regulated the entire Internet, preferably with a kill switch to get rid of all the pesky, fringe elements.

Well-known permabull financial analyst Dick Bove lost his job in November 2012. Not due to his ineptness, but due to his Rochdale Securities colleague David Miller who today plead guilty to wire fraud and conspiracy over an epic Apple trade gone wrong. As Reuters reports, Miller faces a maximum 25 years (though is expected to suffer less) after falsely telling his bosses that he executed a 1,625 share trade for a client, when in fact he bought 1,623,375 shares of the 'never-gonna-fall' stock on the day of its earnings release (October 25th 2012). When the bet backfired, Rochdale was on the hook for the losses which led the firm to cease operations and to provide the market with a brief respite from Bove's 'loan-loss-provision'-ignoring, 'we're-going-to-the-moon-Alice' investment advice on US banks. What a difference a decimal place makes...

VIX, the market's measure of forward-looking expectations of equity volatility has been hovering at decade lows (and even after yesterday's spike has plunged back once again today). MOVE, the bond market's measure of forward-looking uncertainty is at all-time record lows. As one infamous rates trader said recently, maybe it's early Alzheimers, but we are fairly certain that that last time Implied Volatility was scraping the lows, we did not experience:

1. Gold moving almost $250 or over 15% in less than 48 hours;
2. A G-3 currency moving over 25% in less than six months;
3. A G-3 bond yield moving by 35% in two months;
4. The Dow leaping by almost 20% in five months;
5. A joint monetary policy as impactful as Volker or the Paris accords.

We can't help but agree.

Did anyone seriously believe the global economy was expanding so robustly that corporate profits would loft ever higher? Based on what data? Laughably bogus data from China, where warehouses are bulging with stockpiles of aluminum and copper, and a diminishing-return housing/credit bubble is the only "engine of growth"? Or was it the equally bogus unemployment rate in the U.S. that inspired such confidence? Did money managers really not notice that most of those new jobs are part-time, and that the rate is only low because millions of people have statistically been disappeared from the workforce by central planners? Wages, private-sector employment and labor's share of the economy have all declined: no wonder the risk-on recovery is rolling over.